Interesting Findings and Different Perspectives on SaaS Pricing

Even as SaaS vendors re-evaluate and experiment with strategies, fundamental questions about SaaS pricing still remain. For example, the case for SaaS pricing is generally predicated on a bucket list of features.

Does moving up the pricing tier translate into added functionality?

Part of the answer to that question lies in the evolution of SaaS pricing and an entrepreneur’s thinking.

To better understand such answers, I recently attended a panel discussion about Freemium pricing. The panel featured multiple perspectives from lawyers to entrepreneurs to SaaS pricing experts. Needless to add, there was a diverse and rich sprinkling of opinion from multiple perspectives.

Constructing ATiered Pricing Approach: An Entrepreneur’s Perspective

Back in 2005, serial entrepreneur David Weekly ran into an interesting problem. Along with his team, Weekly had invented a Wiki software product. The product became popular amongst a diverse set of users. Thus, casual novice users and serious management experts were equally enthused about the product. While the former set of users used the software to write opinions or random musings, the latter group shared important strategic information via the interface. Unfortunately, the solution’s popularity presented problems during monetization. With such a wildly diverse set of users, how were Weekly and his team to determine pricing?

Weekly and his team tackled this problem by defining resistance thresholds for customers. Loosely defined, each threshold represented a price limit that individual customers would pay for the service.

Customer expectation for features and SaaS usage differed at each price point. For example, customers who paid $5 annual fees were impulse consumers, who used the service casually. On the other hand, consumers who paid $500 as annual fees used the solution as business tools. Outliers, such as Fortune 500 companies that were expected to pay upwards of $500,000 as annual costs, would derive strategic benefit from the Wiki tools.

Weekly clarified that the software’s features did not differ significantly between price points. Instead, the company offered varying levels of support and customization to users based in the price they had paid.

In other words, the original thinking (and one which prevails, for the most part, till today) was that SaaS features do not differ between pricing tiers.

Thus, if you are a small business beginning your SaaS journey, it makes sense to test drive a free solution or invest in a generic SaaS solution, instead of opting for a customized version.

Evaluating Return On Pricing Investments: A Customer’s Perspective

Immediately after the event, I spoke to the audience, which mostly consisted of entrepreneurs and customers interested in understanding the rationale behind SaaS pricing.

One of them made a pertinent point. “It is not entirely about the price,” he said. “Subscribing to a SaaS solution is an investment and it should be backed up by credibility.” In other words, pricing does not trump credibility. Research conducted by Forrester, a consulting firm, further backs up this anecdotal piece of information. According to a 2009 report titled “The ROI of Software-as-a-Service” business owners reported “low user adoption rates, despite significant investments in end user training and user interface design.” SaaS customers cited easy-to-use interfaces and intuitive process flows as additional impetus to move to SaaS. The report further states that “firms can easily identify gaps in user adoption and either eliminate those subscriptions or address.”

Similarly, most SaaS customers claimed that their investments in SaaS solutions did not always guarantee returns. In spite of saving on software costs, most SaaS customers ended up making for the shortfall in expenses by spending on change management, integration, or “force-fitting” a SaaS solution.

Some SaaS customers complained that SaaS did not end up saving infrastructure and resource costs because it covered only “a small footprint of functionality.” As a result, they ended up with additional hardware and resource costs.

The Bottomline

Pricing is a complicated equation of costs, strategy, and ancillary benefits.

Much like any other product, SaaS solutions come with hidden costs that need to be evaluated within your small business. However, as Weekly’s experience showed, understanding the rationale behind features helps you determine the optimal pricing tier suited to your needs.